Forget Walgreens Boots Alliance Inc. (WBA) . With the Aetna Inc. (AET) deal just months from closing, CVS Health Corporation (CVS) is already taking on the likes of UnitedHealth Group (UNH) and becoming one of the largest healthcare companies in the world — and using its retail presence as infrastructure.
"We're making healthcare a retail option, recognizing that healthcare is becoming local," CVS CEO Larry Merlo said in an earnings call Thursday, Feb. 8.
The Woonsocket, R.I.-based company saw its fourth-quarter net income nearly double to $3.3 billion since the same period last year, it reported Thursday. Although the boost was mostly due to benefits under the new tax law, its net revenue increased sizably, from $46 billion last year to $48.4 billion. This growth was primarily driven by strength in its pharmacy, healthcare service offerings and prescription benefit management (PBM) subsidiary, CVS Caremark.
Prescriptions increased by 14.5% in the quarter, for instance, as the PBM segment jumped by 9.3% in revenue. While same-store prescription volumes rose 2.5%, front-of-the-store retail slumped 0.7%, despite help from a strong flu season. The weak retail numbers don't necessarily point to trouble, though.
"They're still struggling in terms of driving same-store sales, but it's not as important as what a lot of retail analysts think," Vishnu Lekraj, an analyst at Morningstar Equity Research, told TheStreet.
That's because "CVS has transformed itself into a brand-new business that hasn't existed in the U.S., a hybrid between healthcare and retail," he added.
Under this model, CVS will use its retail locations as a platform for its health services — especially after it wraps up the Aetna deal, which is expected to close in the latter half of 2018. By 2019, according to Merlo, the two companies will be fully integrated.
CVS' physical footprint will be like "the healthcare equivalent of the Apple Genius Bar," Neil Saunders, the managing director of GlobalData Retail, told TheStreet. "One of the things we like about CVS's plans is the idea of making its stores more of a destination for health solutions."
Merlo underscored the continued importance of retail on the earnings call Thursday. Investments into retail, he said, "will allow us to enhance the role that pharmacy technicians play, which, we believe, is key to enhancing the role that pharmacy can play in overall patient care." CVS's 1,100 MinuteClinics across the country, for instance, are part of its holistic retail healthcare experience, he added.
And accordingly, CVS also announced Thursday that it would invest $425 million to increase hourly employee wages to $11 and expand its paid parental-leave program. Starting April 1, full-time employees will get four weeks of paid parental leave — similar to the benefits expansion made by Walmart Stores Inc. (WMT) and Starbucks Corporation (SBUX) earlier this year.
The Aetna deal, according to Lekraj, will be a milestone for CVS in its transition to becoming a healthcare company, and retail won't be lost in these changes. In fact, CVS will likely expand stores in the coming years, according to CVS CFO David Denton.
"We're still going to continue to grow our store base," he said on Thursday's earnings call. But, he added, with the Aetna integration on the horizon, the new stores may be designed to highlight the combined organization of insurance, medical services and retail.
CVS shares were down more than 5% at Thursday's close, trading at $70.55.